By JOSEPHADINOLFI MARKETS REPORTER
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Is Federal Reserve Chairwoman Janet Yellen capable of conducting a bond market bloodbath? That’s what some on Wall Street are wondering.
Albert Edwards, a market strategist at Société Générale and noted Perma bear, expects Yellen, who is set to deliver semiannual testimony to the Senate Banking Committee on Tuesday, will trigger a steep bond selloff by talking up the possibility that the central bank will raise interest rates in March.
In a note, he refers to the possibility as “The St. Valentine’s Day Massacre,” an homage to the 1929 gangland murder of seven men in a garage in the Lincoln Park neighborhood on Chicago’s North Side. The killings were allegedly planned by famed mobster Al Capone, who was trying to wrest power away from Chicago’s Irish gangsters.
Edwards isn’t the only one who expects Yellen to remind investors that the central bank could raise interest rates at its next meeting for what would be the third time in a decade.
“The market is bracing for the possibility that Yellen will talk up the chances of a rate increase in March,” said Guy LeBas, chief fixed-income strategist at Janney.
Treasury yields, which move inversely to prices, are on track to rise for the third straight day, a selloff that has largely been driven by these concerns, LeBas said. The yield on the 10-year Treasury note TMUBMUSD10Y, +0.41% rose 3.6 basis points to 2.447%.
But a March hike is still viewed as far from likely.
Although the central bank back projected back in December that it would raise interest rates three times in 2017, investors have remained skeptical—probably because they’ve been burned by the Fed before.
Fed funds futures traders are presently factoring in a 35% probability that the Fed will raise interest rates three times in the coming year. They still see only an 18% chance of a March move.
A surprisingly weak rise in average hourly earnings last month has contributed to skepticism over the Fed’s ability to deliver three rate rises. The lackluster reading helped spark the Treasury market’s longest rally since June when the U.K. rattled markets by voting to leave the European Union.
Wage growth is widely considered a harbinger of rising consumer prices, and January’s weak reading has given the Fed yet another excuse to do nothing, Edwards said, though he believes the market’s relief will be short-lived.
Treasury yields rose sharply following President Donald Trump’s unexpected Nov. 8 electoral victory in part because investors bet that his proposed economic policies would boost growth and inflation, allowing the Fed to raise interest rates more quickly.
“The hawk may yet swoop down, talons at the ready, and devour that cooing, market-friendly dove,” Edwards said in his note.
For his part, Edwards believes that January’s lackluster reading on wages was an aberration and that the Yellen Fed will embark on an even more pronounced tightening of its benchmark interest rate than is presently being anticipated by both markets and the central bank’s own projections.
Fed doves argue that monetary policy should remain accommodative for now, whereas hawks advocate for a swifter pace of interest-rate hikes.
Speculators too believe Treasury yields will rise in the near term. Edwards describes the level of bets that Treasury prices will fall as “unprecedented.”
Investors will be presented with yet another reading on inflation Wednesday following the release of the January consumer-price index. The popular gauge of inflation has the potential to rattle the market, said Ian Lyngen and Aaron Kohli, fixed income strategists at BMO Capital Markets.
European bond markets weathered a sharp selloff last week as investors worried about polls showing Marine Le Pen, leader of France’s far-right National Front party, winning the first round of the country’s upcoming presidential election.